Ninth Circuit Gives A Partial Green Light to Cannabis Company Bankruptcies

Earlier today, the Ninth Circuit Court of Appeals issued its long-awaited ruling in the Garvin v. Cook Investments, NW, SPNYW case This opinion is certain to be of great interest to both companies operating in the cannabis space and those attorneys representing them.

In Garvin, the US Trustee appealed confirmation of a plan of reorganization under which one of the debtors leased property to a marijuana grower licensed under Washington law. The US Trustee argued that the plan should not have been confirmed because it was proposed by means forbidden by law in violation of section 1129(a)(3) of the Bankruptcy Code since the lease to the grower violated federal drug law, i.e., the Controlled Substances Act.

The Ninth Circuit rejected the US Trustee’s argument, holding that section 1129(a)(3) forbids confirmation of a plan that is proposed in an unlawful manner, but does not forbid confirmation of a plan that has substantive provisions that depend on illegality. In other words, section 1129(a)(3) requires the court only to look at the proposal of a plan and not the terms of the plan. Because there was nothing in the proposal of the plan at issue that was unlawful, the Ninth Circuit affirmed the orders of the District Court and Bankruptcy Court confirming the plan.

Nonetheless, the Court’s ruling is not a complete victory for the cannabis industry. Courts may still consider whether cannabis companies are engaged in “gross mismanagement” under section 1112(b) of the Bankruptcy Code by virtue of their cannabis-related work. In this case, the US Trustee had waived its argument under section 1112(b). Moreover, the Ninth Circuit made clear that confirmation of a plan does not insulate a debtor from prosecution for criminal activity, even if that criminal activity is part of the plan itself. Thus, while the Garvin opinion provides some comfort to cannabis companies and their insolvency counsel, it does not cure the tension that exists between state law legalizing cannabis and the Controlled Substances Act.

Attorneys Beware: Federal Court Reinstates Aiding and Abetting Breach of Fiduciary Duty Claim Against Law Firm

Attorneys who advise a distressed company usually work very closely with members of the board of directors.  A recent opinion from the United States District Court for the Western District of Texas provides a cautionary reminder to such attorneys not to lose sight of the fact that, notwithstanding that the company acts through its board, the attorneys’ duties are to the company and not to the individual board members.  And, losing focus on the source of the attorneys’ duties may result in exposure to significant liability.

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Relief from forfeiture – in the balance

The demise of high street retail and the insolvency of household names, including Woolworths, BHS, and more recently Debenhams and Monsoon has been a real headache for property owners.

The moratorium created by administration ties the hands of landlords, preventing them from forfeiting leases without first having obtained the consent of the administrator or the leave of the court.

When a landlord (or indeed any creditor) comes to court asking the court to exercise its discretion and dis-apply the moratorium, the court has to undertake an exercise of balancing the impact upon both parties weighing up the rights and property interests of the landlord on the one hand and the interests of creditors on the other.

If a tenant enters voluntary liquidation, a landlord can forfeit the lease without permission of the Court.  But if the lease is a valuable asset an insolvency practitioner can apply to Court for relief from forfeiture to enable that asset to be sold.

A similar balancing exercise is required to ascertain whether the property should be returned to the landlord and the lease forfeit or whether the lease should remain in existence to enable the tenant to remain in occupation or, as in the case of SHB Realisations Limited v Cribbs Mall Nominee (1) Ltd [2019] 3 WLUK 588 to enable the lease to be assigned and monies paid into the insolvent estate.

In SHB, HHJ Ralton sitting in the Bristol County Court granted conditional relief from forfeiture to the insolvent tenant of a retail unit.  It was an unusual order because the tenant was undeniably in breach of a covenant in its 125 year lease to keep the premises open.   In such a scenario the landlord might reasonably expect the Court to allow the lease to be forfeit. Especially, as in this case, the tenant acknowledged that it was in breach of covenant and that the breach would not be remedied.

Whilst the Judge granted relief, it was subject to a condition that relief only be granted for 3 months to allow the tenant to complete an assignment of the lease and if not completed during that period the lease would be forfeit.

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The Small Business Reorganization Act Reintroduced: A Way Forward for Small Business Reorganization?

Last month, Congress reintroduced the Small Business Reorganization Act (“SBRA”), under which a new subchapter V would be added to chapter 11 of the United States Bankruptcy Code.  This new subchapter would provide small businesses with aggregate liabilities that do not exceed $2,566,050 with an opportunity to resolve outstanding liabilities through a streamlined and cost‑effective chapter 11 bankruptcy proceeding.  The SBRA also offers small business owners the opportunity to preserve their ownership interest in the company, unlike state and federal receiverships or assignments for the benefit of creditors which typically result in the company’s liquidation.  Under the SBRA, with proper planning and execution, a small business can successfully emerge from bankruptcy within several months with a court-approved plan of reorganization.  In short, the immense benefits offered to businesses that file chapter 11 bankruptcies will soon no longer be reserved for only large, well-known companies.

New Chapter 11 Opportunity for Small Businesses

Established companies that find themselves financially or operationally distressed may decide to file a voluntary petition in a United States bankruptcy court to initiate a chapter 11 proceeding.  During the bankruptcy case, the company may institute a number of strategies to, among other things, right-size its balance sheet, reduce its outstanding liabilities, renegotiate its funded debt, improve certain lease and contract terms, and auction off all or a portion of its assets, all while its creditors are barred from initiating or continuing any actions against the company to try to collect their debts.  Many chapter 11 bankruptcy cases culminate with the company confirming a plan of reorganization, which allows the company to exit bankruptcy on stronger footing.  To pay for such a substantial undertaking, at the beginning of the case the company will normally obtain debtor-in-possession financing that includes sufficient funds to pay the company’s bankruptcy professionals.

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How do you “undo” a business in the UK? A guide to UK practice

In a series of articles prepared for our “Talk to the International Experts” program we take a look at “Undoing Business in the UK” highlighting the options available to corporates wishing to restructure, wind up or close their UK business.

Click here to read our guide.


Careful Consideration Can Pay Dividends

DividendsFollowing our 2016 article, the Court of Appeal has upheld the decision of the High Court that dividends are liable to challenge as transactions defrauding creditors under section 423 of the Insolvency Act 1986 (the “IA”).

The case of BTI 2014 LLC v Sequana S.A. & Others [2019] EWCA Civ 112 should serve as a warning to directors to consider fully the reasoning behind the declaration of dividends to avoid committing an offence.

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Bankruptcy Court Gives And Then Takes Away In Latest Stern-Related Ruling

What are the limits of a bankruptcy court’s authority to issue final orders and judgments?  Does a bankruptcy court have authority under Article III of the U.S. Constitution to enter final orders in quintessential bankruptcy matters such as fraudulent transfer claims, or are the court’s powers more constrained?  While the Supreme Court’s rulings in Stern v. Marshall, 546 U.S. 462 (2011), Executive Benefits Ins. Agency v. Arkison, 573 U.S. 25 (2014) and Wellness International Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015) laid a framework for answering these questions, confusion still exists.

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Beware SoLR Power in Energy Administrations

Electric power lines at sunset

With the gradual opening of energy supply markets allowing new energy providers to challenge the established providers and bring increased competition to the market, the last two decades have seen an increase in smaller energy providers entering the market and sharing a growing customer base. But what happens to the customers when an energy provider becomes insolvent?

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Seventh Circuit Keeps The Door Open After Asset Sale And Limits The Scope of Section 363(m)

Section 363 of the Bankruptcy Code provides a debtor with the power to sell its assets during the bankruptcy case free and clear of all interests.  This permits the debtor to maximize the value of its assets and hence the recovery for creditors.  But that is not always the end of the story.  In Trinity 83 Development, LLC v. ColFin Midwest Funding, LLC, the Seventh Circuit Court of Appeals faced the issue of whether a debtor can attempt to claw back the proceeds from a section 363 sale even though the sale had already been consummated.  In its March 1, 2019, opinion, the Seventh Circuit held that the debtor’s appeal presented live issues and that section 363(m) of the Bankruptcy Code did not bar the debtor’s claims.

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High Court finds administrator breached his duty- to the tune of £750,000

It was a painful outcome for the administrator of ARY Digital UK Limited (“ARY”) when he was found in breach of duty and liable to pay £743,750.

The case of Brewer and another (as joint liquidators of ARY Digital UK Ltd) v Iqbal [2019] EWHC 182 (Ch) reminds office holders of the importance of understanding what assets they are selling, ensuring that correct marketing processes are employed and obtaining proper valuations.

It also highlights the importance of administrators exercising their own judgment and independence and of the duty to act in the best interest of creditors.  Whilst this might sound obvious to an experienced office holder; the case does highlight the financial consequences of failing do this.  Simply going through the motions with a marketing and sales process without proper consideration of the nature of the asset being sold, could have serious monetary consequences, as the administrator of ARY discovered.

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